Questions tagged [cointegration]

Cointegration is often used in statistical abitrage as a way to identify how to combine some tradable instrument to obtain a *mean reverting* one.

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Pairs Trading: Normalized price series (co-integrated and correlated) always end up diverging

Need some expert advice and suggestions: I am trying out pairs trading or statistical arbitrage (as traders say). But even if two price series are co-integrated (ADF test, Hurst exponent, Ornstein–...
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Cointegrated time-series with a persistent spread

Assume $X_t$ and $Y_t$ represent the prices of the same financial instrument traded in two different markets (in particular they are cointegrated). For some reason the long run equilibrium between $X$ ...
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Finding stock pairs whose spread is used for a risk neutral long-term investment

I am currently working on researching about ways to improve returns in pairs trading. I had previously posted a reference request here, where I had described a toy pair that seemed to be co-integrated....
175 views

Research papers and other resources to learn about useful statistical tools for pairs trading

Brief background: I recently started writing a Python code to find stocks which might be cointegrated. I iterated over a really long list of stocks trying to find a pair which might be cointegrated. ...
190 views

I've been trying to wrap my head around cointegration. Currently I use the log returns of both stocks A and B, calculate the spread given by: $S = log(A) - n*log(B)$ where $n$ is the Hedge Ratio ...
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What do I need the Error correction model for in the two step Engle Granger approach (bivariate Cointegration)

could someone kindly explain what I need the ECM for in a bivariate Cointegration test? I am currently trying to reproduce the results of Rad et al. (2015): "The profitability of pairs trading ...
126 views

Understanding Look Back Period

When people say look back period of 6 months, how does that data look like? Are that 6 months of raw data or a weighted average of that data? I am a little confused on how you come up with beta values ...
691 views

What is the reason for using log prices in Pairs Trading (Cointegration)?

I was wondering, why some of the research papers on pairs trading (using the cointegration approach) are using log prices to determine the spread of a pair? Why are they not simply using regular ...
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How can one, from regular predictions of high & low prices of a security, their variances and error covariance, construct a trading strategy?

Suppose I have an algorithm that provides a prediction of the daily high and low of some security n periods in the future, a confidence interval for each of these predictions, and the correlation ...
69 views

Cointegration and hedge ratio

I've recently been looking into pairs trading through cointegration. So far I've used the log returns of stock A and stock B in a rolling OLS to find the hedge ratio. However, I've noticed that for a ...
53 views

In Pairs Trading: How can high volatility in spreads be explained when there is a market shock?

In my project I tested a Pairs trading strategy in the US equity market for data of 10 years. These 10 years include the financial crisis (2007-2008). The strategy follows a Cointegration approach. ...
33 views

Number of observations required for cointegration test

Hopefully a very simple one. I've got two assets daily close prices. How many observations should I use to test for cointegration between these two assets ? Any pointers wuold be great. A
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Co-integration test on intraday data and day continuation “discontinuity”

I want to implement cointegration test on pairs with intraday data (1min). In order to avoid opening and closing “special” behavior in my statistical computation, I am not taking into account the ...
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How are correlation and cointegration related?

In what ways (and under what circumstances) are correlation and cointegration related, if at all? One difference is that one usually thinks of correlation in terms of returns and cointegration in ...
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How do we know if cointegration is down to luck?

I have done some analysis of various pairs of tickers on the NYSE. I did a brain dead algorithm to come up with all combinations of pairs and then checked all pairs for cointegration/stationarity. I ...
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Why is OLS based spread not reflective of actual difference?

I'm trying to define and track the spread between two time series (data available here), for the purpose of learning pair trading basics. When running a cointegration test the two series seem to be ...
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Given a cointegrated portfolio of stocks, how to build a synthetic option position by using the options on the stocks

The setting Let stocks $A$, $B$, and $C$ are cointegrated. Moreover, we know the weights of the cointegrated portfolio (scaled so that the absolute value of the maximum weight is $0.5$): $w_A = 0.15$ ...
193 views

How to compute returns of a Pairs Trading Strategy with different holding periods?

I am currently working on a project where I am testing a Pairs Trading Strategy based on Cointegration. In this strategy I am considering to trade a couple of hundred stock pairs every day over a time ...
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